Venture capital firm Dragonfly Capital is reportedly under scrutiny by the U.S. Department of Justice regarding its early-stage investment in Tornado Cash, a decentralized cryptocurrency mixer sanctioned by regulators. The probe focuses on potential violations of U.S. sanctions laws tied to the firm’s financial backing of the privacy tool.
Tornado Cash, blacklisted by the Office of Foreign Assets Control in 2022, defied regulatory pressure with a significant resurgence last year, processing $1.9 billion in deposits during the first half of 2024. This rebound occurred despite ongoing legal challenges against decentralized protocols that complicate anti-money laundering and sanctions enforcement.
Dragonfly Capital has publicly defended its investment, asserting it followed guidance from legal counsel and intended to support solutions balancing technological innovation with regulatory compliance. The firm emphasized its commitment to lawful operations amid growing regulatory ambiguity surrounding blockchain infrastructure.
The investigation underscores broader tensions between crypto venture funding and U.S. regulatory frameworks, particularly concerning privacy-enhancing technologies. Analysts suggest the case’s outcome could establish critical precedents for future enforcement actions against investors backing decentralized protocols subject to sanctions laws.